As 2026 opens, what can U.S. auto dealers expect? Overall, trends point to a year of steady sales rather than significant expansion, driven by actual shopper demand rather than federal incentives and policy uncertainty. Let’s look at the key trends and how dealers can make the most of the tax reform package enacted last July.
Higher Prices but Greater Stability
For 2026, most auto dealers can expect a more stable market, with inventory and sales normalizing and estimated at roughly 16 million units — a return to pre-pandemic levels as buyers see a better supply of both used and new vehicles.
Cooling EV Demand
Due to the Trump administration’s rescission of federal tax credits, new electric vehicle (EV) sales will cool slightly, and prices will remain high. Specifically, EV share is expected to decrease from 7.5% in 2025 to 6% in 2026. However, a more diverse and affordable mix of EV offerings will help temper the decline in EV sales in 2026.
Tariffs and Affordability Drive Increase in Used Car Market
Tariffs and resulting material and production costs are causing higher sticker prices for 2026 models. While price increases are expected in the 2%-4% range, the rate remains lower than in 2023-2024. Despite the slight easing in interest rates, affordability — particularly for price-sensitive consumers — will contribute to a revitalization in the used and off-lease markets, including for used EVs, as an abundance of off-lease EVs hit the used-car market.
AI is a Must
Dealers will want to continue investing in AI for online car buying, selling, and financing. Given the ongoing economic uncertainty and labor shortage challenges, dealers will be wise to double down on efforts to personalize the client experience, offering transparency to win customer loyalty. AI will be a must-have for dealers — for dealership operations, automated workflows, and labor efficiencies.
Inventory and LIFO Advantages
Dealers can expect inventory levels to normalize and faster turnover, both of which indicate a healthier market. Overall, there will be a greater balance in inventory, pricing, and days to turn (DTT).
However, with a slow labor market and interest rates still above the Fed’s 2% target, the last in, first out (LIFO) inventory method remains a viable option for dealers. Adopting the LIFO method can provide dealers with a valuable tool for effectively managing cash flow and tax liabilities — especially critical when tariffs erode profits. The LIFO method means that the most recent and more expensive inventory is the first to be treated as sold, leading to a higher cost of goods sold and ultimately reducing taxable income.
Leveraging OBBBA Tax Benefits in 2026
As discussed, some tax incentives have disappeared with the enactment of the One Big Beautiful Bill Act (OBBBA). However, dealers will want to plan strategically to maximize incentives. The following highlights the relevant provisions.
Tax Deduction for Car Loan Interest
- Beginning with the 2025 tax year, for returns filed in early 2026, eligible consumers can deduct up to $10,000 annually in interest paid on qualifying vehicle loans.
- The vehicle must be new – not used – and must have its final assembly in the U.S.
- Loans must originate after Dec. 31, 2024, and the deduction will expire after the 2028 tax year.
- The deduction applies to cars, SUVs, pickup trucks, minivans, and motorcycles under 140,000 pounds and must be for personal use only.
Qualified Business Income (QBI) Deduction
- Permanently extended by the OBBBA
- 20% deduction on qualified trade or business income
- Provides the opportunity to improve cash flow through a permanent tax liability reduction
- Results in a maximum effective tax rate of 29.6% on qualifying income versus 37.6%
100% Bonus Depreciation
- OBBBA reinstates and permanently extends the first-year bonus depreciation provision of section 168(k).
- Allowance is increased to 100% for property that is both acquired and placed in service after Jan. 19, 2025.
- Dealers should consider the interplay between the increased section 179 expense limit (see below) and the increased bonus depreciation.
- Includes image refresh and upgrades to dealership
Section 179 Expense Limitation Increase
- OBBBA increases section 179 expense limits from $1 million to $2.5 million. The phaseout amount above which benefits must be reduced is increased to $4 million.
- Effective for property placed in service after Dec. 31, 2024.
- Both deduction and phase-out threshold adjusted for inflation beginning in 2026.
- Many states decouple from federal bonus depreciation rules but allow these deductions.
179D Energy Efficiency Deduction
- Under OBBBA, the deduction terminates for properties beginning construction after June 30, 2026, though it could be brought back as part of an extenders package.
- Available for new construction and renovated buildings (energy retrofit).
- Best claimed in construction but may be claimed retroactively.
Pass-Through Entity Tax (PTET) Deduction
- OBBBA made the deduction permanent.
- Dealers can elect to pay pass through (S corporation, partnership) state taxes at the entity level, making these taxes deductible for federal tax purposes.
- Cash flow savings of up to 29.6% state tax liability can be substantial.
Business Interest Limitation
- Under the OBBBA, capital-intensive businesses that depend on debt to finance operations and growth can deduct a greater portion of their interest expense.
- Businesses that invest heavily in machinery and fixed assets no longer have to balance the interest limitation with bonus depreciation, since depreciation no longer worsens the amount of deductible interest expense.
- The reduced limitation may be advantageous, so evaluate floor plan interest expense as a business interest expense for purposes of allowing bonus depreciation.
Excess Business Loss Limitation
The OBBBA makes section 461(l) limitation on business losses permanent.
- Affects noncorporate taxpayers and is derived from passthroughs and other businesses that report income on individual returns.
- Business losses are limited to $313,000 for individual filers and $626,000 for married filing jointly in 2025.
- Excess business losses that are unused carry forward as net operating loss and can be used in future years, though these losses are limited to 80% of taxable income in the future year.
Designing a tax strategy for a dealership is not just assembling parts from a checklist; it is crafting a cohesive, purpose-driven system where every component works together to deliver efficiency, reliability, and adaptability.
Final Thoughts
As 2026 begins, U.S. auto dealers can expect a year of greater stability, marked by normalized inventory, steady sales, and a shifting balance toward used vehicles amid higher new-car prices and cooling EV demand. Success this year will hinge on adaptability, digital innovation, and maximizing new tax advantages from the OBBBA — all of which can improve cash flow and support ongoing investment.
To navigate these changes and stay competitive, dealerships should take a holistic approach to tax, operational, and financial strategy. Collaborating proactively with advisors to optimize inventory management, leverage favorable tax provisions, and align business decisions will be key to thriving in a dynamic automotive market.
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